Small Business

New tax laws and regulations change frequently. Knowing how the upcoming tax changes will affect your small business is crucial. Being prepared for changes will help you through the tax season. Consult with your accountant now to ensure you are aware of how these changes will affect your business.

Tax Changes Affecting Small Businesses

The Tax Cut and Jobs Act of 2017 will have a significant effect on your small business tax. Increasing economic growth throughout the United States is the goal behind the sweeping changes. The changes do depend on numerous factors including the amount of profit, hiring, cash on hand, and expenses.

Bonus Depreciation: When the property reaches specific criteria, deduction depreciation will begin at 100%. Starting in 2022, the elimination of the bonus depreciation will be reduced to 80%. Taking four years, the lowered deduction is the first step to phasing out the bonus depreciation.

Vehicle Depreciation: Specific limits go into effect on the amount of vehicle depreciation you will be able to deduct. When a vehicle ineligible for bonus depreciation is put into use after 2017, a maximum of $10,000 depreciation deduction is allowed. After 2017, new limits will go into effect.

Equipment Expenses: The amount of expensing equipment gets a major increase. Up from the $510,000 cap in 2017, the new amount starting in 2018 is 1 million.

Work Opportunity Tax Credit (WOTC): Hiring an individual from predetermined target groups, enables you a $1200 to $9600 credit to help reduce your tax liability.

Family and Medical Leave: A new credit will be in place to reduce your overall liability. An employee will be able to take a maximum of 12 weeks of leave within one tax year.

Cash Method of Accounting: Another specific change in the new tax year focuses on accounting methods. The number of taxpayers using the cash method of accounting increases. The changes must meet specific guidelines including the number of gross receipts and the type of business.

Net Operating Losses: With exception to property and casualty insurance companies, an 80% cap on taxable income is put into place. Unless you are a farming business, the two-year net operating loss carryback was eliminated.

Small business owners are subject to the same kind of thorough record keeping as giant corporations. Don’t make the mistake of destroying small business records before you should. Here’s a guide for knowing what to keep and what you can safely toss.

Bookkeeping Records

Bookkeeping records comprise everything you use to keep track of sales, expenses, invoices and other financial transactions in your business. Whether you use a robust accounting software, a green ledger pad, credit card carbon paper or a shoebox, you need to keep these records.

Bookkeeping records include, but are not limited to:

Payroll records, including evidence of garnishees, when applicable

Petty cash receipts

Credit memos

Bank statements

Cancelled checks (front and back)

These records can be in digital form, if you prefer to scan items. You can safely shred items that you have scanned and filed. Bear in mind that some banks don’t automatically provide statements and cancelled check information after a certain number of years. Be sure to download statements and accompanying documents on a monthly basis. Bookkeeping records are considerably easier to keep if you migrate to software such as Quickbooks, Money or Peachtree.

Expense Receipts

Expense receipts provide proof that business expenses were in fact business expenses, and not personal expenses. If you go to Staples to pick up copy paper, and decide to shop for school supplies on the same trip, be sure to pay for them separately, because the copy paper receipt needs to be saved for record keeping.

Expense receipts include anything your business spends money on to run the business, including:

Company car fuel and maintenance receipts

Utility bills

Parking fees

Office cleaning services

Security system cost for your business location

Deductible meals taken during the course of business

Deductible travel expenses

Basically, if you spent company money, you should have a receipt to go along with it. Though some of these expenses may or may not be deductible, you should still keep the receipt. The IRS is not only interested in making sure you take the right amount of deductions. They also want to make sure you don’t spend business money on personal items. Your accountant will be able to advise you on which expenses are deductible.

Proof of Assets

Assets refer to larger items that a business may deduct on their tax return. These can include company vehicles, office machinery and equipment and furniture. Assets can be depreciated over time or at the time of purchase. Since these are physical items, they will naturally come to the end of their usable life, and you may dispose of them legally. However, to prove you actually owned the asset, it behooves you to retain proof of ownership and use, even after disposal of the asset, in the form of:

Purchase receipt

Photo of the asset being used by your business

Donation receipt

Waste disposal receipt

For a comprehensive overview of your tax recordkeeping practices and for tax related services for your business or non-profit, contact the professional accountants at Ernst Wintter & Associates.